IEA/TPA Budget Briefing 2011

Philip Booth

24 March 2011

The opening and closing remarks of George Osborne’s budget speech did not bode well. He talked about: “a budget for making things”; he wanted a budget that supported manufacturing and then, as he closed, he said: “we want the words ‘made in Britain’ a Britain carried aloft by the march of the makers.” In other words, the Chancellor wanted the message to go out that this was a budget for the 9% of the UK economy involved in making things. The government’s rhetoric is about picking winners. Stuffing teddy bears is in; the 74% of the British economy involved in producing services is out.

To attain economic growth – the ostensible purpose of the budget - businesses must be guided by price and profit signals to produce what consumers value. Britain did not suffer a financial crisis because we produced too few teddy bears and too many credit derivative swaps but because our banking system was not disciplined by market mechanisms and was over-indulged by loose monetary policy.

So, we needed a general agenda for liberalisation, not an agenda for manufacturing. Why is this so important? Liberalisation is important at any time to ensure that the economy is not artificially held back and to ensure that people are not prevented from working. Liberalisation is especially important at the current time. If output growth is only 1.5% over the next few years – rather than the 2.6% the government expects - then debt stabilisation will not be achieved. Indeed, recent suppy-side shocks do not seem to have been allowed for in growth forecasts. The government is ignoring the real possibility that the trend growth rate has fallen by 1% of more as a result of recent increases in taxes, government spending and regulation. Also, any boom and bust period leads to the misallocation of economic resources. We need to ensure these resources are rapidly redeployed together with the economic resources that are effectively being made redundant from the government sector.

So, how does the reality of the budget stack up against the rhetoric of the “growth budget”? In this respect, the following are the most interesting measures:

100 pages cut from the tax code in a process of tax simplification.

Employment regulations costing £350 million dropped.

A moratorium on new business regulation for businesses with fewer than 10 employees for three years.

Liberalisation of planning.

An increase of about 8% in the basic tax threshold.

Further reduction in corporation tax rate.

The reduction in corporation tax rate is welcome. Indeed, if the corporation tax rate were reduced to 20% - down to the basic rate of income tax – it would allow a considerable simplification of the tax system, both in terms of the principles by which the system operates and in terms of the administrative burdens.

In other respects, though, the reality is less promising than the rhetoric:

The budget cuts only 1% from the UK tax code: indeed, more pages will be added because of additional measures in the budget. Most of the abolished reliefs do not, in fact, distort economic activity - they just cost money to administer. They include items such as the removal of reliefs for angostura bitters which is only produced by one company.

Regulations imposed since 1998 alone cost business £90billion a year. The budget moves are a drop in the ocean – representing just 0.4% of that cost. With regard to small business, there will be no rolling back of regulation – just exemption from new regulation.

The planning proposals only seem to apply to areas where building is already permitted. These proposals will do little to help reduce pressure on house prices. And, if land supply is limited, the government’s plan to guarantee deposits will lead to higher house prices – as well as exposing taxpayers to housing market risk (few lessons learned from the causes of the crash in the US, apparently).

Finally, a new perpetual stealth tax was announced. In future tax thresholds will be under-indexed (to CPI) rather than being indexed to more general measures of inflation. Indirect taxes will still, for foreseeable future, be linked to RPI!

The stalling of the rate of increase of government burdens on business is welcome. If George Osborne is able to take any credit from this budget in the long sweep of history then – rather as with his plans on public spending – it is because he will be able to say “I stopped the tide and tentatively began to turn it back”.